Saturday, April 23, 2011

To Rent or To Own

I tell people I have been looking to buy a place for 10 years, and for the most part, it's a true statement. Back after the turn of the century, my good friend Akemi Tinder and I did the dutiful tour through several of Boston's neighborhoods on consecutive Sundays in May, each of us looking to buy a condo. The hunt ended with her settling on a neat South Boston first-floor one-bedroom, with a Jacuzzi on the back patio. It led to me staying right where I am today, where I have always been, in an apartment on Beacon Hill that I always said I would rent until I buy a place.

Around that same time, I decided there was fundamentally something wrong with the real estate market. I visited a mortgage broker (remember them?) who said I could borrow a truly obscene amount of money and would only have to put five-percent or so down on the purchase. Through a home equity line of credit (HELOC), he explained, I could simply hold off paying the standard down payment (20-percent) until the home value increased a few years after a purchase, using the HELOC loan to cover the down payment in the meantime.

"OK so I get it now," I remember saying. "But what happens if the value of the home doesn't go up?"

"Ummm," came the reply from the broker, between condescending chuckles. "They always have, Ross."

The mortgage crash of the past few years, coupled with an American population that is coming to grips with the realities of the current and likely ongoing economic situation, has caused a fundamental rethinking of home ownership in this country, in my opinion. The American dream--indeed, the very inculcated sense of success in this country--has always included owning a home. Cities push for home ownership to promote healthy, vibrant communities. The conventional wisdom is ingrained in us all: You rent when you are either in college, too young to know what you want to do when you grow up, or when you are in a transitional stage in life. Otherwise, you own.

I am not an economist, but the tapestry of problems with the mortgage thing, in my opinion, boils down to two points. First, the mortgage industry has been propped up forever by the government, which created Fannie Mae and Freddie Mac to make it easier for people to get loans (simply put, the government has been willing to take much more risk than the private sector). Second, people are greedy. As one of my favorite authors, Michael Lewis, chronicled so nicely in The Big Short, everyone involved in the mortgage industry was making so much money just a few years ago that they didn't want to admit there was something fishy going on. The were addicted to it, despite the damage it was causing.

Given the crash, it makes sense that banks today would rather not give out any mortgages at all. The rules today put forth by the banks are ridiculous. More fundamentally, banks are not willing to give out mortgages that are not backed by Fannie Mae and Freddie Mac, since the banks want the assurance they can potentially sell the debt to the government-backed entities.

So the government is supporting the industry right now, until the banks get their sea legs again. And no doubt history will repeat itself, with the industry getting greedy once it's back on solid footing, and the government there to support it.

However, our elected officials in Washington are considering getting rid of Fannie Mae and Freddie Mac. Republicans think the industry can support itself, without needing taxpayer assurances. President Obama agrees that the government has too much skin in the housing game, and he agrees that the elimination of Fannie Mae and Freddie Mac is worth discussion. [Note: The New York Times has covered this issue at length.]

If Fannie Mae and Freddie Mac go bye-bye, you can also likely say goodbye to the 30-year mortgage, providing even less incentive for home buying. And let us not forget that our elected officials are also openly discussing tax reform that includes scaling back or eliminating the popular interest deduction, which I am reminded about almost every time I note my reluctance to buy.

With government support, the real estate industry has spent decades promoting the American dream of home ownership. Have you ever heard a real estate agent say it's a bad time to buy? I don't blame the industry, since it's good for business. The concept of ownership in general is uniquely American. One of our government's fundamental tenets is rooted in John Locke's teachings, the concept that we all have a right to life, liberty and property.

But forces today are strongly opposed to home ownership. In addition to legitimate concerns about how the mortgage industry operates, the economic woes of the past 15 years have caused Americans to tighten their belts. As today's New York Times put it:

Instead of wanting the biggest and the newest, even if it requires a long commute, buyers now demand something smaller, cheaper and, thanks to $4-a-gallon gas, as close to their jobs as possible. [New York Times, "Builders of New Homes Seeing No Signs of Recovery," by David Streitfeld. April 23, 2011.]

I would add to the Times assessment that Americans today have a desire or a need to be mobile. The demise of the old-style corporation and the shift away from workers' rights has meant people need to be willing to move, if necessary, to find work. Plus, it's taking longer for younger Americans to settle, which delays their home buying decisions.

Then there is the whole argument about whether a home is a good investment. I think it is, but only if you are planning to stay in the same home-- paying down the mortgage-- for a long time. Say 20 years. The online calculators I have used show that, given modest increases in home values, it takes a dozen years or so for buying a home to be more lucrative than renting one. And of course, no one is expecting even modest increases in home values in the near term.

If America is to become more a nation of renters and less a nation of owners, it will have a profound effect on what we think about our neighborhoods, about our preference for suburbia, and it could dramatically affect the balance between the haves and the have-nots. I don't dispute that. I merely note that given how the mortgage industry has changed forever, given the reality of the lack of growth in family wealth over the past 15 years, and given other factors such as gas price increases, the luster of home ownership is long gone.

I certainly don't profess that any of the reasoning above is why I did not buy a home before the housing crash. That was because I am merely a wimp.


Anonymous said...

Excellent piece. I'm waiting for someone on the right to decry the mortgage interest deduction as welfare.

Two problems with our American culture that are wrecking havoc on the economy - (1) the overvaluing of home ownership and (2) the inappropriate link between jobs and healthcare plans.

Park Street Rambler said...

Fantastic article! Your argument is strong on every point. I bought a home a little over two years ago. While I'm happy with it and enjoy my location, I am decidedly "stuck" if my life or job situation changes drastically, and I doubt I will see a significant (if any) return on my investment given the Nation's economic outlook.

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